WSJ Compares German and American Safety Nets

I like this Wall Street Journalpage-one “leder” looking at the difference in the European and American safety nets and how that affects workers and the economies.

It also broadens the story’s implications with a good nut graph about why this impacts all of us right now:

Unemployment is taking a very different human toll on opposite sides of the Atlantic, which helps explain why Europe and the U.S. can’t agree on how to attack the global recession. The U.S. is spending hundreds of billions of dollars — including increased assistance to the unemployed — to prop up the economy, and wants Europe to follow suit. But most of Western Europe already has a strong, if costly, social safety net, so governments feel less pressure to spend their way out of trouble.

The Journal tells this story through two laid-off autoworkers, one in Illinois and one in Germany. The lede does well to sum up the difference between the two systems:

In Germany, losing his factory job didn’t stop Alfred Butt from taking a Mediterranean vacation this winter. Thanks to generous jobless benefits, being out of work “hasn’t changed my life that much,” Mr. Butt says.

In the U.S., Dylan DeRoberts lost similar work — but there’s no seaside getaway for him. Instead, he’s giving up life’s little pleasures, like riding his snowmobile, because he lost his insurance, too. “I’ve learned to live at a new level,” Mr. DeRoberts says.

Butt, of Germany, gets 80 percent of his wages and doesn’t pay for health care out of that. DeRoberts, of Illinois, gets less than one-third of what he made before he was laid off. Health care?

Mr. DeRoberts, who lost his job at a Chrysler assembly plant in Belvidere, Ill., near Rockford, last year, saw his medical benefits expire several months later. He says he can’t afford to pay the premiums on his own.

“It’s scary being without insurance,” Mr. DeRoberts says, but adds: “What do I give up? Food?”

That goes a long way toward explaining the huge discrepancy in these numbers:

The public mood isn’t as bleak as the economic data. In Germany, gross domestic product has been in free fall since September. Most people think the crisis will get worse, according a recent poll by market-research group Emnid — but 62% say they aren’t feeling it themselves so far. In the U.S., only 13% say they’re not at all affected personally, according to a recent Wall Street Journal/NBC poll.

But, of course, somebody has to pay for that safety net, and the Journal covers the tax issue well, too.

The European way takes a toll in taxes. In Germany, over half the total cost of employing somebody consists of income tax and mandatory contributions to programs including unemployment insurance and pensions. In the U.S., that figure is 30% — meaning employees take home more of the money it costs to employ them…

The upshot: German workers cost significantly more to hire, on average, than U.S. workers, even though they can’t buy quite as many goods with their take-home pay. That impacts both employment and consumer spending in Germany. On the other hand, Americans must pay extra for health insurance, unlike most Europeans.

Unemployment is the same in the U.S. as it is in Europe, but the Journal says:

But Europe’s high payroll taxes, along with restrictions on when and how companies can lay off workers, make employers slower to rehire when a recession ends.

That’s one reason why economists expect the U.S. to stabilize faster than Europe.

And good balance here, pointing out not-so-hidden costs for Americans:

The upshot: German workers cost significantly more to hire, on average, than U.S. workers, even though they can’t buy quite as many goods with their take-home pay. That impacts both employment and consumer spending in Germany. On the other hand, Americans must pay extra for health insurance, unlike most Europeans.

The Journal also does well not to oversimplify the story, something it would have had to do in a smaller space. It notes that “Europe” is not a monolith—that taxes and benefits are much lower in the UK and Eastern Europe, for instance.

Less-generous European countries include Greece, where initial benefits replace less than half of lost wages, on average. Heavily indebted households in countries such as the U.K. and Ireland, where property and lending bubbles have burst, are also particularly vulnerable in the recession. Economic pain in less-developed Eastern Europe is a separate and much deeper problem.

I think the Journal should also have noted that the Germans get many more benefits from their higher taxation—not just rich unemployment benefits—especially since it’s chart looks at total wage-tax burden, not just what unemployment costs.

Also, it might have pointed out that lots of smart folks now acknowledge that the past fifteen or twenty years have been an economic mirage, a series of bubbles inflated by the financialization of the economy. So what’s been a clear American lead in the economic-growth statistics needs to be revisited.

Krugman a couple of weeks ago noted a study that signaled that the productivity gap between the U.S. and Europe since 1995 came significantly from the financial sector. That turned out to be fake, and ultimately harmful, productivity.

Still, it’s overall a nice effort by the Journal.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.

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